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Price skimming is a pricing strategy
Pricing

Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and Distribution . It is also a key variable in microeconomic price allocation theory....
 in which a marketer
Marketing

Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large....
 sets a relatively high price
Price

Price in economics and business is the result of an exchange and from that trade we assign a numerical monetary Value to a product , Service or asset....
 for a product
Product (business)

The noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce from the Latin produce, lead or bring forth....
 or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management
Price discrimination

Price discrimination exists when sales of identical good or Service are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where...
. It allows the firm to recover its sunk cost
Sunk cost

In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken....
s quickly before competition steps in and lowers the market
Market

A market is any one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy....
 price.

Price skimming is sometimes referred to as riding down the demand curve.The objective of a price skimming strategy is to capture the consumer surplus If this is done successfully, then theoretically no customer will pay less for the product than the maximum they are willing to pay.






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Price Skimming Small
Price skimming is a pricing strategy
Pricing

Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and Distribution . It is also a key variable in microeconomic price allocation theory....
 in which a marketer
Marketing

Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large....
 sets a relatively high price
Price

Price in economics and business is the result of an exchange and from that trade we assign a numerical monetary Value to a product , Service or asset....
 for a product
Product (business)

The noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce from the Latin produce, lead or bring forth....
 or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management
Price discrimination

Price discrimination exists when sales of identical good or Service are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where...
. It allows the firm to recover its sunk cost
Sunk cost

In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken....
s quickly before competition steps in and lowers the market
Market

A market is any one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy....
 price.

Price skimming is sometimes referred to as riding down the demand curve.The objective of a price skimming strategy is to capture the consumer surplus If this is done successfully, then theoretically no customer will pay less for the product than the maximum they are willing to pay. In practice it is impossible for a firm to capture all of this surplus.

Limitations of Price Skimming


There are several potential problems with this strategy.

  • It is effective only when the firm is facing an inelastic demand curve
    Demand curve

    In economics, the demand curve can be defined as the Graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price....
    . If the long run demand schedule is elastic (as in the diagram to the right), market equilibrium will be achieved by quantity changes rather than price changes. Penetration pricing
    Penetration pricing

    Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers....
     is a more suitable strategy in this case. Price changes by any one firm will be matched by other firms resulting in a rapid growth in industry volume. Dominant market share
    Market share

    Market share, in strategic management and marketing, is the percentage or proportion of the total available market or market segment that is being serviced by a company....
     will typically be obtained by a low cost producer that pursues a penetration strategy.
  • A price skimmer must be careful with the law
    LAW

    LAW may refer to:* Anti-tank warfare, e.g. the US Army M72 LAW or the British Army LAW 80*Palestinian Society for the Protection of Human Rights ...
    . Price discrimination is illegal in many jurisdictions, but yield management is not. Price skimming can be considered either a form of price discrimination or a form of yield management. Price discrimination uses market characteristics (such as price elasticity) to adjust prices, whereas yield management uses product characteristics. Marketers see this legal distinction as quaint since in almost all cases market characteristics correlate highly with product characteristics. If using a skimming strategy, a marketer must speak and think in terms of product characteristics in order to stay on the right side of the law.
  • The inventory
    Inventory

    Inventory is a list for Good and materials, or those goods and materials themselves, held available in stock by a business. It is also used for a list of the contents of a household and for a list for will purposes of the possessions of someone who has died....
     turn rate can be very low for skimmed products. This could cause problems for the manufacturer's distribution chain. It may be necessary to give retailers higher margins to convince them to enthusiastically handle the product.
  • Skimming encourages the entry of competitors
    Competition (economics)

    Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services....
    . When other firms see the high margins
    Margin (economics)

    In economics, a margin is a set of constraints conceptualized as a border. A marginal change is the change associated with a relaxation or tightening of constraints ? either change of the constraints, or a change in response to this change of the constraints....
     available in the industry, they will quickly enter.
  • Skimming results in a slow rate of stuff diffusion
    Diffusion (business)

    Diffusion is the Process by which a new idea or new product is accepted by the market. The rate of diffusion is the speed that the new idea spreads from one consumer to the next....
     and adaptation. This results in a high level of untapped demand. This gives competitors time to either imitate the product or leap frog it with a new innovation. If competitors do this, the window of opportunity will have been lost.
  • The manufacturer could develop negative publicity if they lower the price too fast and without significant product changes. Some early purchasers will feel they have been ripped-off. They will feel it would have been better to wait and purchase the product at a much lower price. This negative sentiment will be transferred to the brand and the company as a whole.
  • High margins may make the firm inefficient. There will be less incentive to keep costs under control. Inefficient practices will become established making it difficult to compete on value or price.


See also

  • pricing
    Pricing

    Pricing is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and Distribution . It is also a key variable in microeconomic price allocation theory....
  • marketing
    Marketing

    Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large....
  • microeconomics
    Microeconomics

    Microeconomics is a branch of economics that studies how individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold....
  • production, costs, and pricing
    Production, costs, and pricing

    In microeconomics, industrial organization is the field which describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions....
  • business model
    Business model

    A business model is a framework for creating economic, social, and/or other forms of value. The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operat...
  • price skimming
    Price skimming

    Price skimming is a pricing in which a marketing sets a relatively high price for a product or Service at first, then lowers the price over time....